Financial
needs anaysis (FNA) is defined as a process to identify individual
financial needs in order to develop strategies for an investment plan to
meet those needs and financial goals. Before going into detail about the FNA process, let me explain the three main categories of financial needs;
(I) The accumulation of needs is defined as a future financial necessity than a desire to sideline. The motivation for accumulating a sum of money in the future include
education of children, start a business, real estate investment, buying a
car, early retirement or giving to charity.
(Ii) Need for Retirement is defined as the financial need to provide funds to support our life after our retirement. When we retire, our pension benefits or social security income start but our work ceases. Reduce our labor costs but our free time and medical expenses increase.
(Iii) Protection Needs are defined as financial obligations that need
to meet death, disability, contracting critical illness, loss or damage
to property and / or when a personal responsibility arises.
Having a general idea about the three main categories of financial
needs, let me go through the process of Financial Needs Analysis:
(1) Data discovery -> (2) identify and quantify the financial
requirements -> (3) Identify investment products that meet the
financial goals -> (4) Periodic review of financial needs
1. Fact Finding
Collect
personal information, employment details, number of dependents,
financial information, existing insurance policies, retirement needs,
savings goals, objectives and investment preferences. Personal
data such as age, gender, status and smoking habits martial we will
make a preliminary assessment of the types that probably suits us to
offer financial products. Employment
status allows us to determine if income protection for high risk work
is needed, and the ability to commit investment product over the medium
term. The number of dependents will determine the amount of additional financial support. The
more dependent we have, the greater the number of years that we have to
support them, which means they need more life insurance and income
protection. The financial information as monthly income will help you determine
the continuing income required in case of death, disability or
retirement.
Expenditure
information will help you determine the level of income necessary for
the family to survive in case of premature death of family heads, and to
estimate the funds available for investment. The
assets and liabilities information helps determine the net value,
allowing us to decide on the amount of funds for investment or to adjust
our lifestyle to reduce liabilities. Existing insurance policies serve as a starting point for any additional insurance product. The
objectives and investment preferences help determine our attitude
toward investment risk, which ranks in averter, Risk cautious, balanced
search and Risk. Retirement
needs of information allows us to determine the monthly amount in
today's dollars that we and our dependents need to live in retirement. In
general, most singles need about 50% to 60% of their pre-retirement to
maintain the same standard of living after retirement income. The percentage increase 60% to 70% for married couples with one retired. Saving goals information helps determine if funding for various financial goals are appropriate.
2. Identification and Quantification of Financial Needs
After
we have gathered all the data through finding facts, the next steps of
FNA process is to analyze the data to identify and quantify financial
needs. We collect the weaknesses that may adversely affect its financial targets. For example; amount
of debt, the investment portfolio, existing insurance products, living
within its means, investment time horizon, liquidity needs, education of
children and risk profiles. Determine what objectives should be given greater priority. Three factors should be considered in the analysis of the objectives:
Establish whether the goal is short term or long term. Short-term
goal is more appropriate for the retired person wishing to increase the
revenue generated from the investment of capital. Long-term goal is more suitable for someone who wants enough money to send her newborn to college in the future child. However, the objectives can be both long and short term.
Establish if the objective is to benefit ourselves or others, as dependents. For example, the goal may be going our estate to our grandchildren in case of death. Moreover, the goal may be to early retirement.
Prioritizing objectives. For example, you may want to invest a second property, but to achieve this goal; You can expense a reasonable income in retirement. It is important to address every financial need and discover those needs that require immediate attention.
Once all the financial needs are identified and prioritized, each need to be quantified. The ways of quantifying the needs of retirement protection and accumulation are different. There are two methods to quantify retirement needs, namely the replacement rate method and cost method. As
for the need for protection, the method includes determining the sum of
total liabilities and immediate expenses required at the time of death
and the amount needed for dependents as long as necessary. Multiple Focus and needs are two common approach used to quantify the amount needed for dependents. For the purposes of consolidation, the focus is to find the future value of the target amount, taking into account inflation. After we quantified data, proceed to the next step in identifying investment products that meet the financial targets.
3. Identify investment products that meet the financial goals
Points
to consider include investment objectives, product suitability,
affordability, taxation, tax relief, rick tolerance, pension plans,
prioritization and the effect of inflation and the time value of money. Investment
instrument that meets the accumulation and retirement needs include
money market securities, fixed income, equity investment, derivative
instruments, property, Unit Trusts, Whole Life Insurance, Endowment,
products and revenues Investment-Linked. Investment
products that meet the needs of protection include term insurance,
whole life insurance, Insurance Foundation, Life insurance linked to
Investment Riders, Critical Illness Insurance, Insurance Long Term Care,
Medical Expenses Insurance and Managed Health Insurance and disability income insurance. General insurance products that meet the needs of protection include
fire insurance, home owner / House Insurance, Personal Accident
Insurance and Personal Liability Insurance.
4. Periodic review of Financial Needs
The process of identifying financial needs does not stop with the implementation. Our financial needs may change over time. It affects our initial investment plan, as they may not be suitable. For
example, a sharp drop in the share price would be a sign that an
analysis of the investment portfolio and substantial savings by
investing in equities is necessary. Periodic review of the financial needs that we can stay on track to our financial goals.
